Holding cash is not such a bad idea! (page 1 of 2)

What I find remarkable about the United States is that Americans have the talent to always put on a huge show, which then turns into a lot of hot air.

The US went with "The Best Team in the World", as the Americans proclaimed, to the Winter Olympics in Turin. However, the best team was Germany, which won with a population just 30% that of the US, 29 medals compared to 25 for the US, while Austria with a population of less than 10 million won 22 medals.

A lot of hot air is also visible on Wall Street. Despite all the bullish statements by strategists and analysts, so far the Dow Jones Industrial and the S&P are up year-to-date just 3%! By comparison, Hong Kong is up year-to-date 6%, India 13%, while the best performing stock market in Asia was Vietnam, which is up 29%.

And while I am somewhat hesitant to chase the Vietnamese stock market on the way up, looking at the valuation of Vietnamese shares, which hovers around 10 times earnings and the country's promising economic prospects, it is likely that the market will continue to rise much further. Elsewhere, year-to-date, Russia was up 32%, Peru 31%, the Kingdom of Mr. Bush's Pen Pal, Hugo Chavez, 49%, Brazil 29%, while Qatar and the UAE were down 20%.

Correction time

Last month's commentary made the case that a correction time had begun or was imminent. This remains my view and I would like to reiterate my near term negative stance toward all asset classes, including commodities, for the intermediate term (3 - 6 months).

There are several reasons for this pessimistic view. First, mid-term election years in the US have a tendency to decline into October following an initial rally, in the first few months of the year.

The second reason for being cautious about the US stock market is that the Bradley Model, which is based on planetary alignments, will shortly turn down. The Bradley model correctly called the current rally by bottoming out in December 2005, and will turn down again in November 2006. And while I would certainly not bet my farm on the basis of the Bradley model, its record compares rather favorably with the forecasts of Wall Street strategists and analysts.

Another reason for caution is the well-established tendency for the stock market to do well between October and May but to perform poorly over the summer months. In the past, the best time to buy stocks was usually around October/November and to sell in the spring.

I may add that the four year stock market cycle (it lasts about four years from trough to trough) will also bottom out in October 2006, since the present rally began in October 2002. Based on the four year cycle a sharp decline starting soon is likely.

Then, there is the issue regarding interest rates. As I have opined before, it is likely that in the next few years yields on US treasuries will rise further than is now commonly assumed. In fact, of all asset classes, it is very probable that 30-year US-Treasury bonds are the worst possible investment should one buy them with a view to hold them to maturity.

I am not talking here about buying bonds as a trade for the next ten minutes or 3 months but as an asset an investor would wish to hold for the long term. In fact, with 2-year US Treasury notes, now yielding around 4.7%, I suspect that they already offer some competition for equities, a competition, which will become more intense as yields rise to and above 5%. I am aware that a large number of investors are betting that the Fed will soon refrain from raising short term interest rates.